How to Start a Mutual Fund: Everything You Need to Know

If you're interested in how to start a mutual fund, explore this popular method used by new investors to increase their wealth.3 min read

What Are Mutual Funds?

If you're interested in how to start a mutual fund, explore this popular method used by new investors to increase their wealth. A mutual fund is a bundle of a few, or as many as thousands of, stocks and bonds. You can invest in all these stocks and bonds just by buying one mutual fund. Because you are pooling your money with other investors, this offers immediate diversification with less volatility.

Investors in these types of funds pay a professional portfolio manager to buy and sell bonds and/or stocks for them. They charge you an expense ratio, as well as a load fee based on the type of fund shares you buy.

Many mutual funds offer subpar performance that costs investors money. However, many investors would rather invest in mutual funds than in individual stocks.

Fund managers have different goals depending on the type of fund:

A fixed-income fund strives to offer the most profit with the lowest possible risk

A long-term growth fund strives to make more than the S&P 500 or Dow Jones Industrial Average during each fiscal year

What Is a Mutual Fund Sales Load?

Some mutual funds have a fee called a sales load. Sometimes these fees are for buying and selling funds. Types of loads include front-end, back-end, deferred, and declining. The highest sales load occurs when a fund is bought and then quickly sold. Avoid funds that have a sales load to save money. They lower your potential profit, especially in the long term.

Are Low-Cost Index Funds the Best Mutual Fund Investment?

If you want to grow your wealth with minimal hassle, many experts recommend investing in low-cost index funds. These funds correlate to a specific index like the NASDAQ Stock Market or the Dow Jones 30. Because this type of fund doesn't trade frequently, they offer minimal expenses and usually don't have a sales load fee. However, if the composition of your low-index fund changes, you may experience a rebalancing effect as the fund responds. Some experts say these funds are too slow to adjust to economic conditions. However, if you're new to investing, index funds are a low-cost way to get your feet wet.

How Do I Select a Fund That's Right for Me?

Each type of fund follows a specific investing strategy. You should strive to invest in a fund that fits your criteria and investing style. When you've selected a fund, research it in either Standard and Poor's, or Morningstar. These companies rank funds based on their past performance. However, this does not necessarily indicate future performance, especially when there's a new fund manager.

Do Research Before You Begin

Do your homework before you begin building your mutual fund portfolio. Investing your time in research will save you money. The only other expense is the transaction fee, which is less than $20 a trade at most discount brokerage firms. Choosing good stocks on the first try can keep you from incurring additional trading expenses if you need to dump poor performing "loser" stocks. Research the stocks of companies you are interested in on sites like:

CBS MarketWatch

Motley Fool

Yahoo Finance

Learn more about mutual funds by exploring Investopedia. Expand your knowledge by enrolling in a community college investment class, reading books about investing, or completing online tutorials. If you don't have time to build a strong portfolio on your own, focus on mutual funds with no loads and an expense ratio of less than 1 percent. You'll need to be persistent and dogged with your research to create a successful mutual fund. If you invest the time, however, you can reap the benefits of lower costs, higher returns, and a personal feeling of achievement.

Sustainability of the Investment

A fund's relative performance, or performance relative to the index and its peers, is the most important factor in choosing a mutual fund. Each fund has a benchmark based on the performance of similar funds according to Standard and Poor's and other resources. You should consider selling if your mutual fund is not performing up to the benchmark and you are being charged by the mutual fund manager.

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